Chapter 27
Measuring Domestic Output
and National Income
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Assessing the Economy’s
Performance
• National income accounting measures
economy’s overall performance
• Bureau of Economic Analysis compiles
National Income and Product Accounts
• Assess health of economy
• Track long-run course
• Formulate policy
LO1
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27-2
Gross Domestic Product
• Measure of aggregate output
• Monetary measure
• Avoid multiple counting
• Market value final goods
• Ignore intermediate goods
• Count value added
LO1
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27-3
Monetary Measure
LO1
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27-4
Gross Domestic Product
Continued
(1)
Stage of Production
(2)
Sales Value
of Materials
or Product
$
0
Firm A, sheep ranch
120
Firm B, wool producer
180
Firm C, coat manufacturer
220
Firm D, clothing wholesaler
270
Firm E, retail clothier
350
Total Sales Value
Value Added (total income)
LO1
(3)
Value
Added
]--------$120 (= $120 - $ 0)
]-------- 60 (= 180 - 120)
]-------- 40 (= 220 - 180)
]-------- 50 (= 270 - 220)
]-------- 80 (= 350 - 270)
$1140
$350
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27-5
Gross Domestic Product
Concluded
• Exclude financial transactions
• Public transfer payments
• Private transfer payments
• Stock market transactions
• Exclude second hand sales
• Sell used car to a friend
LO1
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27-6
Two Approaches to GDP
• Income approach
• Count income derived from production
• Wages, rental income, interest income,
profit
• Expenditure approach
• Count sum of money spent buying the
final goods
• Who buys the goods?
LO1
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27-7
Two Approaches to GDP Cont’d
Expenditures or Output
Approach
Income or
Allocations Approach
Consumption by
Households
Wages
Investment by
Businesses
Rents
+
+
+
Government
Purchases
Expenditures
By Foreigners
LO1
G
=D=
P
+
+
+
+
Interest
Profits
Statistical
Adjustments
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27-8
Expenditures Approach
• Personal consumption expenditures (C)
• Durable goods
• Nondurable goods
• Consumer expenditures for services
• Domestic plus foreign goods produced
LO2
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27-9
Expenditures Approach
Continued
• Gross private domestic investment (Ig)
• Machinery, equipment, and tools
• All construction
• Positive and negative changes in
inventories
• Creation of new capital assets
• Noninvestment transactions excluded
LO2
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27-10
Expenditures Approach:
Investment
=
Gross Investment
Depreciation
Net Investment
Gross
Investment
Net
Investment
Depreciation
Stock
Stock of
Capital
LO2
January 1
Consumption,
government
expenditures,
and net exports
of
Capital
Year’s GDP
December 31
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27-11
Expenditures Approach
Concluded
• Government purchases (G)
• Expenditures for goods and services
• Expenditures for publicly owned capital
• Excludes transfer payments
• Net exports (Xn)
• Add exported goods
• Subtract imported goods
• Xn= exports (X) - imports (M)
GDP = C + Ig + G + Xn
LO2
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27-12
Accounting Statement for
the U.S. Economy, 2015
LO2
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27-13
Comparative GDP
LO2
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27-14
The Income Approach
• Compensation of employees
• Rents
• Interest
• Proprietor’s income
• Corporate profits
• Corporate income taxes
• Dividends
• Undistributed corporate profits
• Taxes on production and imports
LO3
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27-15
The Income Approach
Continued
• From national income to GDP
• Subtract net foreign factor income
• Statistical discrepancy
• Consumption of fixed capital
• Other national accounts
• Net domestic product (NDP)
• National income (NI)
• Personal income (PI)
• Disposable income (DI)
LO3, LO4
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27-16
U.S. Income Relationships 2015
LO4
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27-17
Circular Flow Revisited
LO4
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27-18
Nominal GDP vs. Real GDP
• GDP is a dollar measure of production
• Using dollar values creates problems
• Nominal GDP
• Based on prices that prevailed when
output was produced
• Real GDP
• Reflect changes in the price level
• Use base year price
LO5
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27-19
GDP Price Index
• Use price index to determine real GDP
Price
Index
In Given
Year
Real
GDP
LO5
=
=
Price of Market Basket
in Specific Year
Price of Same Basket
in Base Year
× 100
Nominal GDP
Price Index (in hundredths)
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27-20
GDP Price Index Continued
• Calculating Real GDP (Base Year = Year 1)
LO5
Year
(1)
Units of
Output
(2)
Price of
Pizza
Per Unit
(3)
Price Index
(Year 1 = 100)
(4)
Unadjusted,
or Nominal,
GDP
(1) × (2)
1
5
$10
100
$ 50
$50
2
7
20
200
140
70
3
8
25
250
200
80
4
10
30
---
---
---
5
11
28
---
---
---
(5)
Adjusted,
or Real,
GDP
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27-21
Real World Considerations
27-22
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Shortcomings of GDP
• Nonmarket activities
• Leisure
• Improved product quality
• The underground economy
• GDP and the environment
• Composition and distribution of output
• Noneconomic sources of well-being
LO6
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27-23
Underground Economy
LO6
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27-24
Gross Output
• Sum of
• Resource Extraction
• Production
• Distribution
• Final Output (GDP)
• Larger than GDP
• Better reflection of productive side of
economy
LO6
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27-25
Sources of BEA Data
• Consumption
• Census Bureau’s Retail Trade Survey
• Census Bureau’s Survey of
Manufacturers
• Census Bureau’s Service Survey
• Industry trade sources
27-26
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Sources of BEA Data Continued
• Investment
• All consumption data sources
• Census Bureau’s Housing Starts Survey
and Housing Sales Survey
• Retail Trade Survey
• Wholesale Trade Survey
• Survey of Manufacturing
27-27
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Sources of BEA Data Concluded
• Government Purchases
• Office of Personnel Management
• Construction surveys
• Census Bureau’s Survey of Government
Finance
• Net Exports
• U.S. Customs Service
• BEA surveys and analysis
27-28
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